Managing a seniors housing construction project is a complex process, and property owners may find it difficult or overwhelming to ensure that their construction budget is being used effectively and efficiently. In an effort to prevent excess billing and to keep project budgets on track, many owners are turning to independent third-party experts to conduct construction audits.
Unlike a typical financial audit, construction audits examine contracts, payment applications, change orders, schedules and other documents related to a construction project to determine if contractor billing and controls complies with contract language. The resulting audit report identifies cost recovery opportunities that ultimately could save a project millions of dollars.
In the long run, cost findings from a construction audit can save an owner a substantial amount of money, and more often than not, the cost findings from an audit outweigh the fees related to conducting the audit. In fact, these audits have saved owners an average of $15 in cost findings for every dollar charged in auditor fees.
Causes of Excess Billing
Excess billing is a widespread problem, and no exception is made for seniors housing projects. Many seniors housing construction projects employ a guaranteed maximum price-cost (GMP) reimbursable contract, meaning there is a set maximum price set for the project. Should the project come in under budget, however, the lower amount will be billed.
All construction projects that utilize a GMP contract are susceptible to excess billing whether the contract is large or small. But the larger the price tag of the project, the larger the risk. Furthermore, just because the project may come under the guaranteed maximum price, it does not necessarily guarantee that excess billing did not occur.
The most common areas where excess charges can occur are:
- Labor and Labor Burden: Labor is billed at rates that don’t match contract language or what employees were actually paid.
- Equipment: Throughout the duration of the contract, the cost of renting the equipment exceeds the value of equipment.
- Change orders: Sole source negotiations with contactor produces excessive fees and rates.
- Fees: General contractor’s fee and markups are charged in excess or on items that do not comply with the contract.
Unfortunately, many owners believe that a construction audit is not necessary because the project manager is there to oversee and ensure the integrity of the project. While project managers are capable of successfully managing plans, as well as coordinating and overseeing construction of a building, they perform these tasks through the lens of an engineer rather than a financial advisor. The simple truth is that many project managers do not know what risks to look for when it comes to construction billings and accounting.
After the Audit
Once an audit is complete, the auditor will summarize key findings and deliver a report to the property owner. Should excess billing be uncovered during the audit process, the report may assist in the recovery of funds. Usually, there are two ways the owner and the contractor can settle the dispute:
1) The contactor may agree to provide a credit for the overage cost and the owner must agree with the terms.
2) If the contractor and owner fail to agree on a credit, there may be possible litigation and negotiations down the road. In each instance, the audit report can be valuable documentation of the project costs and be used to inform the settlement and negotiations.
Unforeseen changes to construction project timelines, regulatory and infrastructure requirements and financing hurdles can cause costs to soar and lead to project delays. Hiring a construction auditor makes financial sense for a property owner and should be built into any construction project budget.
It’s best to involve a construction auditor early in the process so they are involved throughout the duration of the project. If hired at the onset of a project, auditors can proactively mitigate risks before work begins by reviewing the contract and strengthening its language, better ensuring an owner’s resources are used efficiently and effectively over the life of the project. Conducting interim and final audits will help reduce the risk of excessive cost and ensure all proper controls are in place.